Fuller-2009-Asian Politics & Policy

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Intellectual Property Rightsand Foreign Investment:The Political Economy of Taiwan’sTechnology-Intensive ForeignDirect Investment _1150 726..738

Douglas B. FullerKing’s College, University of London

This article employs Taiwan’s institutions for intellectual property rights (IPR) to explaintwo aspects of Taiwan’s foreign direct investment behavior: the location of offshore sites

for Taiwanese research and development, and investment by Taiwanese venture capital-ists. The article rst describes the evolution of Taiwan’s informal IPR practices that differfrom the ideal typical IPR regime supposedly required for economies as technologicallysophisticated as Taiwan’s. Essentially, Taiwan has developed informal practices to protectcorporate IPR that are centered on internal corporate mechanisms rather than externalformal legal mechanisms. Relying on these informal practices, the article discusses howTaiwan has invested in technology-intensive activities in locations where IPR protection isweak. This behavior stands in sharp contrast to the behavior of multinationals from theOrganisation for Economic Co-operation and Development countries.

Key words: intellectual property rights, political economy, R&D, Taiwan, technology, venture capital

Introduction

T his article uses Taiwan’s institutions for intellectual property rights (IPR) toexplain two aspects of Taiwan’s foreign direct investment (FDI) behavior:the location of offshore sites for Taiwanese research and development (R&D), andinvestment by Taiwanese venture capitalists (VCs). The article rst describes theevolution of Taiwan’s informal IPR practices that differ from the ideal typical IPRregime supposedly required for economies as technologically sophisticated asTaiwan’s (Dam, 2006). Essentially, Taiwan has developed informal practices to

protect corporate IPR that are centered on internal corporate mechanisms ratherthan external formal legal mechanisms. The article then argues that these prac-tices are conducive to operating in other environments where IPR regimes are

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incomplete according to the standards of most advanced economies. Taiwanesetechnology-intensive rms are thus relatively more likely to invest in R&D activi-ties in countries with relatively poor IPR regimes than technology-intensive rms

from other advanced economies. The article presents patent evidence comparingTaiwanese and foreign multinational corporation (MNC) patenting behavior inthe developing world. Similarly, Taiwanese VCs are more willing to invest intechnology-intensive companies in economies with weak IPR regimes than VCsfrom countries with rigorous IPR protection regimes. Here a case study compar-ing the investment choices in China of Taiwanese VCs to those of foreign inves-tors demonstrates the technology-intensive bias of the Taiwanese.

Formal IPR and Informal Protection Mechanism

From Gwartney, Lawson, and Easterly (2006), one can see the improvementsand limits of Taiwan’s IPR regime. After a series of reforms to improve patentrights were passed in 1994 (see Yang, 2008), Taiwan’s IPR system was consideredto still lag behind those of the large economies of the developed world (labeledLarge OECD in Table 1), but reasonably comparable with the other three EastAsian newly industrialized economies (NIEs) of that era (labeled East Asian 4 inTable 1) and better performing than less developed economies of that time, suchas India, China, and the Philippines. As with most of the rms listed in Table 1,Taiwan’s IPR system has improved over the intervening decade since 1995. Thegap with the developing economies has grown, but the East Asian 4, with the

Table 1. IPR Protection (10 = best, 1 = worst)

Country 1995 2004 Average Rank Type

USA 7.8 9 8.4 1 Large OECDGermany 8 8.8 8.4 1 Large OECDSingapore 7.3 8.4 7.85 2 East Asian 4U.K. 7.1 8.5 7.8 3 Large OECD Japan 6.8 7.2 7 4 Large OECD

Hong Kong 6.1 6.6 6.35 5 East Asian 4Taiwan 5.9 6.5 6.2 6 East Asian 4South Korea 4.3 5.8 5.05 7 East Asian 4India 4.1 5 4.55 8 DevelopingChina 4.2 3.7 3.95 9 DevelopingPhilippines 4 3 3.5 10 DevelopingRussia 1.6 2.3 1.95 11 Transitional

1995 2004 Average

Large OECD 7.425 8.375 7.9East Asian 4 5.9 6.825 6.3625

Developing 4.1 3.9 4

Source: Gwartney et al. (2006).

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exception of star performer Singapore, still lag behind the large developedeconomies in their IPR protection as these economies also improved their IPRregimes over the decade.

Interview data from ongoing research involving more than 400 interviewsconducted by the author in greater China, India, and the United States between1998 and 2008 with foreign rms involved in the global information technologyindustry and Taiwanese rms from a range of industrial sectors provide addi-tional insight to the evolution of Taiwan’s IPR system. Although Taiwan’s legalsystem for protecting intellectual property (IP) has evolved and strengthenedover time, rms with particularly vulnerable IP have also used informal mea-sures internal to the rm to protect their IP. It was not so long ago that the rmsthat led Taiwan’s technological development had to develop their own privatemechanisms to provide assurance to their customers that IP would not be stolen(Fuller, 2008). Furthermore, the interviewed Taiwanese rms explained how theyhoned internal corporate mechanisms in Taiwan to protect their IP. For example,fabless design rms (rms that design chips but do not manufacture themin-house) and software rms kept the workstations used to design proprietarytechnologies in secure rooms that engineering staff could only enter by usingspecial electronic cards and passwords. And they did not stop there. The work-stations had no USB ports and were Internet-disabled so that engineers could notsteal les through memory sticks or via the Internet. With the size of modernintegrated circuits (ICs) and software programs, no one engineer could memorizesufcient digital data to steal signicant IP just by relying on their memory(author interviews).

While foreign rms looked askance at investing in serious R&D and otherIP-generating activities in countries with poor IPR records, such as China (authorinterviews; Walsh, 2003), Taiwanese rms were much more willing to invest inIP-creating activities in countries with poor IPR records. This article demon-strates the greater willingness of Taiwanese rms to invest in poor IPR environ-ments through two sets of data. The rst examines foreign and Taiwanesepatenting activity in China relative to patenting activity outside of China, par-ticularly with reference to India. The comparison of R&D activities in India andChina is signicant because these are the two main sites for locating R&D in thedeveloping world (Asakawa & Som, 2008, p. 376). 1 Thus, rms looking to placeR&D functions in the developing world generally move the functions to one of these two Asian behemoths. The second set of data compares the investment behavior of Taiwanese and foreign VCs in China.

Patenting: Taiwanese and Foreign MultinationalCorporations Compared

As part of the globalization of R&D documented by Reddy (2000), Taiwaneserms as well as the typical MNCs from the Organisation for Economic Co-operation and Development (OECD) countries have over the last decade movedR&D offshore to cheaper locations, such as the developing countries listed in

Table 1. Indeed, India and China have been favorite destinations for such R&D-related FDI. However, in terms of IP-generating activities to these nations, thereis a great divergence in the behavior of MNCs. The Taiwanese rms strongly favor

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China, which has an IPR record of weak and declining protection. The MNCsfrom the OECD favor India, which has substantially beefed up its IPR regime inrecent years. Indeed, India is closer to OECD member South Korea in the

strength of IPR regime than it is to China. Interviews with MNCs by the authorconrmed that the view of India as having a much stronger IPR regime thanChina was widespread. Not one of the interviewed MNCs claimed that Chinahad equivalent or better IP protection than India, and the vast majority assertedthat India’s was much better. Even the Taiwanese rms, which overwhelminglyfavored China, pointed out the weakness of China’s IPR regime. The interviewdata suggested that MNCs perceived an even larger gap in IP protection perfor-mance between India and China than the data by Gwartney et al. (2006) suggests.

Field interviews with MNC R&D centers in China by Quan (2005) suggestedthat MNCs deal with China’s IPR regime by breaking R&D into discrete tasksand outsourcing the noncritical ones to China. This argument actually ts wellwith the idea that the Taiwanese would be more willing to move important R&Dactivities to China because of Taiwan’s rened and experienced means of pro-tecting IP beyond the simple method of divvying up the tasks and offshoring thesimple ones. This divergence in R&D practices should show up in the amount of patents generated and where the lead inventor on the patent is located.

Given this background, this section uses patent data to test three hypotheses.The rst hypothesis is that Taiwanese will create more patents in China thanMNCs will. The second hypothesis is that MNCs will create more patents in Indiathan Taiwanese rms. The third hypothesis is that the proportion of MNCs’ R&Dconducted in India will be higher than the proportion conducted in China.

The data used in this section are from the U.S. Patent and Trademark Ofce(USPTO). The USPTO has compiled data on the active patentees from variouscountries from 2003 to 2007 (U.S. Patent and Trademark Ofce, 2008). Activepatentees are dened as those with at least ve utility patents granted by theUSPTO within this period. Location is determined by the location of the leadinventor listed on the patent. Thus, the USPTO reports look only at patents wherethe important contribution comes from an inventor located within a givencountry.

In China, the Taiwanese have been very active in patenting. Fourteen rms,including two Taiwanese-invested China-based rms, SMIC and Grace, had veor more patents from 2003 through 2007. Furthermore, despite the small size of Taiwan’s economy relative to the combined economies of the OECD countriesfrom which most MNCs hail, Taiwan has created more patents with the leadinventor in China than MNCs have (see Tables 2 and 3), with 668 Taiwanesepatents compared to 447 MNC ones.

When one examines the proportion of patenting from China for the Taiwaneseand MNCs, the much greater willingness of the Taiwanese to make intensive useof China’s human resources to create technology is apparent. The overall rate of lead inventor patents to worldwide patents created during the same time periodwas 14.2% for Taiwanese rms and a mere 0.704% for MNCs. Thirteen of 14Taiwanese rms had at least 1% of their lead inventor patents from China. Only

10 of the 21 MNCs did, and several of the results may have been biased in favorof a higher proportion from China for the MNCs. For example, SAE Magneticswas originally a Hong Kong rm. Subsequently, it was bought by a Japanese rm,



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Table 2. Taiwanese U.S. Utility Patents From China, 2003–2007

Taiwan Firms Lead Inventor Patents Worldwide Patents Proportion

Hon Hai 393 2,073 0.1895803Hong Fu Jin 72 117 0.6153846Fu Zhun 44 80 0.55SMIC 38 38 1Winbond 23 335 0.0686567Asia Optical 18 88 0.2045455Futaihong 17 20 0.85Grace 15 15 1FIH 11 15 0.7333333Foxconn Technology 8 101 0.0792079Inventec 14 317 0.044164Ben Q 5 454 0.0110132Lite-On 5 275 0.0181818VIA 5 762 0.0065617Total 668 4,690 0.1424307

Source: Author’s analysis based on USPTO data.

Table 3. MNC U.S. Utility Patents in China, 2003–2007

MNC Name Lead Inventor Patent Worldwide Total ProportionMicrosoft 190 4,967 0.038252SAE Magnetics 44 177 0.248588Intel 40 8,573 0.004666IBM 26 16,315 0.001594Molex 17 343 0.049563P&G 14 1,480 0.009459Great Neck 13 21 0.619048Siemens 12 3,409 0.00352Philips 11 4,737 0.002322GE Medical 9 909 0.009901

Emerson Networks 8 11 0.727273GE 8 5,049 0.001584Nokia 8 3,116 0.002567Lifetime Products 7 61 0.114754Canon Kabushiki 6 9,987 0.000601Chevron 6 418 0.014354 JDS Uniphase 6 362 0.016575Schlumberger 6 1,076 0.005576Arcsoft 5 19 0.263158COSCO Mgt. 6 90 0.066667ST Microelectronics 5 2,379 0.002102

Total 447 63,499 0.007039Source: Author’s analysis based on USPTO data.



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so the total patents should be those of the Japanese parent company. Likewise, theU.S.-based Emerson Networks is a recent subsidiary of Emerson created whenEmerson bought Shenzhen-based Avansys in China. Thus, the patents for that

rm should perhaps be compared to those of the parent company rather thanthose of the new subsidiary.Turning to India, no Taiwanese rms were present among the active patenting

foreign rms. Field research in India by the author also found that the Taiwanesewere not even present in the elds in which they are successful technologygenerators, such as semiconductors. Among the active patentees, Taiwanese rmsgenerated zero patents, whereas MNCs created 761 as shown in Table 4.

As for patents within MNCs, only six out of 24 MNCs in India had less than 1%of their patents in this period from India. The proportion of patents from Indiacompared to worldwide patents was much higher for MNCs in India than inChina, 1.12% compared to 0.704%. As mentioned above, data for some of therms in the China data overstated the proportionality of their rm’s patentscoming from China. And if the anomalous case of Microsoft, which has a very

Table 4. MNC U.S. Utility Patents in India, 2003–2007

MNC Lead Inventor Patent Worldwide Patents Proportion

TI 141 4,066 0.034677816

IBM 134 16,315 0.008213301GE 113 5,049 0.022380669ST Micro 80 2,379 0.033627575Cisco 30 2,547 0.011778563Broadcom 27 2,078 0.012993263GE Medical 27 909 0.02970297Honeywell 27 2,626 0.010281797HP 24 9,075 0.002644628Cypress 22 788 0.027918782Intel 16 8,573 0.001866325Freescale 15 1,001 0.014985015Sun Microsystems 15 3,314 0.004526252Unilever 14 692 0.020231214Novell 13 119 0.109243697ADI 10 691 0.01447178Cirrus Logic 9 273 0.032967033Cadence 8 360 0.022222222National Semiconductor 8 1,146 0.006980803Adobe 7 228 0.030701754Microsoft 6 4,967 0.001207973Diebold 5 257 0.019455253Genesis 5 59 0.084745763SAP 5 113 0.044247788

Total 761 67,625 0.011253235

Source: Author’s analysis based on USPTO data.



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weak presence in India and a strong presence in China, was excluded, the gap inproportionality between India and China would be much higher. Furthermore,the MNCs in India were all technologically intensive rms, i.e., rms involved in

high-technology sectors. A number of the MNCs patenting in China were rela-tively low-technology rms, such as Great Neck (saws) and Lifetime Products(sporting equipment).

In sum, the patent data found all three hypotheses to hold true, and otherevidence also suggests that these patenting patterns hold true beyond these setsof data collected by the USPTO.

Venture Capital in China: Comparing the Behavior of Taiwanese andForeign VCs

To acquire an understanding of venture capital investment in the technologysector in China, the author conducted semi-structured interviews with venturecapitalists active in China with 22 foreign and domestic VC rms between 2003and 2007. These interviews were quite evenly distributed, with nine domestic,seven Taiwanese, and six foreign VC rms interviewed. Included in the Taiwan-ese sample were two VC rms founded by Taiwanese Americans. These tworms were founded in the United States, but with extensive long-term experiencein investing in Taiwan, their practices and behavior were closer to that of Taiwanese VCs than American ones. Additional data were provided by morethan 300 additional interviews with technology rms active in China and withChinese government ofcials and academics between 1998 and 2008 as part of

ongoing research on technological development in China. Interviews were con-ducted either in Mandarin Chinese or English (Fuller, 2009). 2In this section, venture capital is dened narrowly as the early stages of

equity investment as opposed to latter-stage mezzanine, turnaround, and buyout investments typically associated with private equity investment in theWest (Ahlstrom, Bruton, & Yeh, 2007). Although the objective of the researchwas to interview VCs and eschew investigating private equity rms, amongthe domestic Chinese rms often little differentiation was made between thesetwo types of activities. Thus, the interview subjects included domestic rmsinvolved in private equity. Foreign investment rms that more closelyresembled private equity rms were excluded. Similarly, this study excludedstate-run incubators that undertook equity investments in their incubatees.However, many of the ndings of the inefcacy of the state-run VCs apply tothe state-run incubators as well.

This case study of the venture capital industry found that the foreign VCs,Taiwanese VCs, and domestic VCs differed dramatically in their investmentpatterns. The Taiwanese VCs were the most successful in promoting technologi-cal development through their investments, and the domestic Chinese VCs werethe least successful in this endeavor. This typology departs from those typologies based on formal organizational features of the VCs. For example, White andhis colleagues (2005) divided China’s VCs into government rms, foreign

rms, corporate rms, and university rms. While these divisions do exist, theydo not all seem to be the relevant ones for explaining investment behavior intechnology-intensive sectors.



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The main nding was the dramatic difference in the number of investmentsin technology-intensive start-ups among the three types of VCs. Technology-intensive start-ups aim to create products (both tangible and intangible) embody-

ing a signicant amount of technology knowledge and skills. These rms dependon their technical skills to differentiate their products in order to ensure rmsurvival and success. Given that China is still a developing country, these tech-nical skills are not necessarily cutting-edge ones, but given prevailing wage ratesthey do not have to be. However, these rms are worthless without their coreengineering teams. Contrasting with these technology-intensive rms werestart-ups trying to compete on their business models or service ideas. Thesetechnology-light rms were not trying to compete on the basis of the strength of their technical teams, but rather had other strategies for rm survival. On the onehand, there were commercially oriented start-ups trying to be rst to market witha certain business model or service new to China or at least slightly differentiatedfrom what was already on the market. On the other hand, there were start-upstrying to survive by take advantage of connections to the state to feed at thetrough of state procurement.

Several general criteria were used to differentiate the technology-intensiverms from technology-light rms. Firms were considered technology-intensiverms if they created new tangible products in-house, with production (asopposed to sales or other ancillary functions) requiring the employment of university-educated engineers as the majority of employment measured in termsof either total wages or total employment headcount. Fabless IC design houses, of which there are many VC-invested ones in China, are an example of this type of

rm. Firms creating new intangible products broadly dened to include designservices for others with the same employment prole as above were also consid-ered technology-intensive. Software service rms are one example of this type of rm. Although there is a common misperception that software service rms arenot technology-intensive, the experience of India, where offshoring of this typeof work has a relatively long history, suggests that these rms have technicalskills as an essential component of their business survival and success (Dossani& Kenney, 2007). Firms considered to be technology-light met neither of theabove criteria, either by not producing technology-based products and services atall, or by not using sufcient engineering resources relative to the rm in doingso.

The research for this article did not involve investigating every target rminvested in by one of the interviewed VCs to see if they matched these criteria.Rather, the determination of whether the invested rm was technology-intensivewas made by judging whether the target rm matched the prole of rms likelyto meet the above criterion. Thus, a VC-invested call center would not t either of the above proles of technology-intensive rms, as a large body of engineerswould not be necessary to service calls. On the other hand, a VC-invested fablessdesign house would t the prole of a technology-intensive rm given the highlikelihood of the rm employing large numbers of engineers (relative to thenumber of the rm’s employees) to produce its products. These proles are not

simply based on some assumed deductive logic but on empirical observations of Chinese technology rms, based on the more than 300 interviews within thetechnology sector mentioned at the start of this section.



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The information about which target rms VCs invested in was drawn from theinterviews as well as from an update, conducted on May 1 and 2, 2008, thatsearched the Web sites of the VCs for the foreign and the domestic VCs. The VCswith which the author had most recently conducted interviews, all of which fellinto the Taiwanese category, were not updated at this time. The number of technology-intensive rms in which the rms had invested for each category of VC is presented in Table 5. The Taiwanese were most oriented toward investingin technology-intensive rms, the foreign VCs were moderately interested, andthe domestic VCs were the least interested in making such investments. For thedomestic Chinese VCs, the number in parentheses in the total row represents anadditional estimate of 100 additional non-technology-intensive, even noncom-

mercially viable investments that an interview subject claimed one municipality-controlled fund had made through six state-run VC rms.The foreign VCs and Taiwanese VCs both drew on international capital rather

than domestic Chinese capital for their funds and sometimes from the very samecountries because the transnational ethnic Chinese networks in which theTaiwanese VCs were embedded had close connections with the biggest sourceof venture capital, the United States (Saxenian, 2006). Nevertheless, there was avery important distinction between the two types of rms. The foreign rms notembedded in the transnational ethnic Chinese networks did not have a lot of exposure to investing in markets where the formal protection of property rights,IP rights in particular, has been poor, whereas the Taiwanese VCs had extensiveexposure to such markets (Saxenian & Li, 2003).

From operating in Taiwan, the Taiwanese VC rms were able to learn aboutinformal mechanisms to protect their own IP and, more important, the IP of theirinvested rms. Thus, they were much more willing to invest in technologicallyintensive rms than those foreign VCs still relying on formal legal regimes toprotect property rights in countries where the formal regimes were weak. Whathas been somewhat true for Taiwan has been even truer for China. China’s recordof IP protection has been dismal given the failings of its formal legal regimes, asseen in Table 1. Thus, only VCs comfortable with dealing in such an uncertainlegal environment would invest in rms where IP creation was a major part of the

business.Therefore, it is not surprising to nd that the Taiwanese VCs demonstrated apropensity to invest in rms that wanted to compete in terms of technology

Table 5. Technology-Intensive Investments

Type of VentureCapital Firm

Taiwanese-invested

Foreign-invested

DomesticChinese

Number of Technology-IntensiveInvestments

39 44 16

Total Number of Investments 64 166 130 (230*)

Source: Author interviews.



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creation, occasionally even on globally new technologies, in Chinadespite its poorlegal environment. While these rms did not reject investment in service-orientedrms that were technologically light, they put at least an equal or even stronger

emphasis on investing in technology-creating rms. One VC even described thisas the “two-less” strategy, referring to fabless design houses and wireless technol-ogy. The latter often meant wireless services, but there was some distinction asthe Taiwanese were more willing to consider investing in rms creating wirelessequipment than were the other foreign VCs, which were mainly interested ininvesting in wireless services. These Taiwanese VCs claimed to have made similarinvestments in earlier years in places like Taiwan when the conventional wisdomwas that Taiwan was too far behind technologically and too lawless in terms of IP protection to progress successfully and protably in technology creation. Theytended to view China as having a very similar environment to Taiwan and the restof emerging Asia in the 1980s and 1990s. In other words, they believed thatwhatever institutional obstacles China presented to technology developmentcould be overcome. Furthermore, the interviewed Taiwanese VCs mentioned theuse of the same informal mechanisms to protect IP mentioned in the introductionof this article— mechanisms that were originally developed in Taiwan.

In contrast to the Taiwanese, the foreign VCs were mainly interested intechnology-light service-oriented ventures where they could see an existing largemarket in China currently or in the very near future. These VCs did not typicallyinvest in IC design rms or other types of technology creation because they wereconcerned about IP theft, and they were skeptical that anyone could make thereturns they desired in such endeavors using less than cutting-edge technology

on par with Silicon Valley.The skepticism about returns on less-than-cutting-edge technology was thereverse image of the Taiwanese VCs’ condence in this model of realizingrespectable returns from investing in precisely this trailing technology. Thisdiscrepancy suggests that the experience of different routes to success character-ized by cutting-edge Silicon Valley versus trailing-edge Taiwan might also haveinuenced the investment patterns of the two types of rms. However, thedifference in managing IP protection is sufcient to account for the investmentdifferences and has the advantage of utilizing metrics regarding the strength of IPregimes that came from outside the interview data.

Domestic VC rms suffered from the general maladies affecting the domesticChinese nancial system: China suffers from a severe misallocation of nancialresources due to a state-dominated system riddled with noneconomic motiva-tions in allocating credit (Fuller, 2005; Huang, 2003; Steinfeld, 1998; Yusuf,Nabeshima, & Perkins, 2006). Many of the domestic VC rms were effectivelyunder the authority of state organizations. These political organizations naturallyhad many noneconomic objectives that they expected their subsidiary organiza-tions to pursue. These rms tended to be investment vehicles for larger stateprojects or state-sponsored rms, many of which suffered from all the classicmaladies of soft budget constraints (Fuller, 2005; Steinfeld, 1998).

Of the two domestic private VC rms interviewed, one generally stayed away

from the real business of venture nancing. It shied away from nancing early-stage rms because of the perception that these investments were too high-risk. Given their lack of links with the state-run banking sector, with its bias



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against private enterprises (Huang, 2003), this difdence to invest in technology-intensive sectors was typical (Fuller, 2005; Gregory, Tenev, & Wagle, 2000).

The other chose to try to follow the lead of foreign VCs and invest where these

VCs invested. Indeed, the two domestic rms that managed to actually do someinvestment in potentially promising start-up rms rather than state-fundedprojects followed this strategy. They decided to follow the investment lead of various foreign, including Taiwanese, VCs in order to resolve the self-identiedproblem of being inexperienced venture investors. Through this mechanism,they could rely on the better selection and monitoring skills of the foreign VCs.However, these two rms tended to invest in technology-intensive rms at thesame rate as the foreign, rather than Taiwanese, VCs; i.e., 25% of their portfolioconsisted of technology-intensive rms.

Furthermore, the other rm that employed this follower strategy clearly hadpolitical interference guiding some of its investment choices. The rm was set up by a central government ministry, but with a twist on the usual bureaucraticstate-run venture rm. The appointed head decided to try to make a viablecommercial rm. so he recruited a team of venture capitalists who had extensiveVC experience outside of China. However, despite recruiting a team thatresembled the typical Taiwanese VCs’ management team, the ministry-led rmhad to invest in a number of noncommercial state projects, such as science parksand other noncommercial projects that were never designed to be prot-generating enterprises.

ConclusionA plausible counterargument to the IPR institutional differences argumentmade here would be that the Taiwanese invest in Chinese-speaking regions andforeign rms invest in English-speaking ones. However, there are a number of reasons to question this counterargument. First, it does not explain the differ-ences made after investing. The MNCs still come to China on a large scale evenif they shy away from technology-generating activities. Indeed, FDI from theOECD countries as a whole in China dwarfs India’s total cumulative FDI from allsources (Naughton, 2007, p. 413; United Nations Conference on Trade and Devel-opment, 2007, p. 267). When one compares MNCs and Taiwanese just withinChina, the Taiwanese pursue more technology-intensive activities even whenthere is a substantial foreign presence, such as the major presence of MNCs andforeign VCs in China. The presence of foreigners in areas like venture capitalsuggests that the language issue is overcome (usually by hiring bilingual ethnicChinese to manage the operations), but the persistent difference in investing behavior remains. Second, given the large amount of brain circulation from Chinato the West and back again (Saxenian, 2006), coupled with English being spokenonly by a minority of people in India, the supposed English language gap is notas large as it seems. Indeed, one could argue that given its much larger stream of returnees from the West than India has (Saxenian, 2006), China is more likelyto reap opportunities cooperating with MNCs to create technology than India,

yet the evidence shows otherwise. Finally, Taiwanese rms have a signicantresearch presence in North America and Europe, so language constraints do notseem to be very serious in R&D.



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What draws Taiwan to mainland China is the opportunity for institutional-cum-cost arbitrage. Given that the main choices for R&D investment in thedeveloping world are India and China, the ability of the Taiwanese to conduct a

broad scope of R&D in China whereas the foreign MNCs are unable or unwillingto do so presents the Taiwanese with lucrative arbitrage opportunities. Compe-tition among MNCs is driving up wages for technologists in India very quickly(Dossani, 2007; author interviews). By avoiding competing with MNCs forIndia’s technologists and turning to a pool of technical talent with fewer MNCcompetitors in China, the Taiwanese are able to save money through their supe-rior knowledge of the institutional practices necessary to conduct R&D in China.

A similar story applies for the venture capital case. Taiwan’s VCs are benet-ting from avoiding competition with the MNCs. In this instance, it is not becausethe MNCs are not conducting the same general activity in China (venturecapital), but because the foreign VCs pursue a very different strategy that leads toquite different investment targets. Neither Taiwanese nor foreign VCs are veryactive in investing in such technology-intensive start-ups in India because theIndian start-ups tend to be focused on services and rely much more on internalfunding due to the low cost of starting these service rms (author interviews).

Given Taiwan’s prominence in investing in technology-intensive activities inChina, should one then expect rms from other countries with poor IPR regimesto be able and willing to invest in technology-promoting activities in China? Inprinciple, one should expect this. However, the realities of theworld are that thereare only a handful of countries that have the technology to invest and historicallyrelatively poor IPRregimes, principally theEastAsian NIEs. Singaporeneeds to be

discounted because of its quite strong IPR regime (see Table 1) and the relativedominance of the MNCs in its own R&D activities (Wong, 2007, p. 156). In effect,local rms in Singapore are weak and peripheral players in the technology sector,so they are not going to be investing in technology activities abroad. Hong Kong’stechnology sector is very weak (Baark, 2008), so it too can be discounted fromplaying a role in spurring technology in the developing world.

This process of elimination leaves South Korea as the last viable candidate.South Korea does invest in both India and China, but South Korea did not showup on either the patent data or the data on VCs. From interviewing South Koreanrms in India and China, I found that they appear to be keeping most of theirR&D at home, which corresponds very well with their complete absence from thepatent data. One reason South Korea may not be trying to take advantage of institutional arbitrage the way the Taiwanese are is that South Korea has tendedto have a much more concentrated economy than Taiwan, with more large rmsand fewer start-ups. With this less entrepreneurial environment, perhaps corpo-rate controls and long-term employment have been enough to keep SouthKoreans from leaking information to other rms. Thus, South Korea has notneeded to develop IP-protecting skills. Another explanation for South Korea notfollowing the Taiwanese pattern is that the South Korean rms are simply takinga much slower approach to the globalization of R&D than their OECD andTaiwanese counterparts, regardless of their approach to IP protection. The fact

that South Korean rms are moving very slowly to shift R&D resources to Indiaand China suggests a generally more cautious approach to the globalization of research.



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Notes1The developing world in this denition excludes the now wealthy East Asian NIEs.2This section draws heavily on Fuller (2009).

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